Concepts in Federal Taxation 2019 (with Intuit ProConnect Tax Online 2017 and RIA Checkpoint 1 term (6 months) Printed Access Card)
26th Edition
ISBN: 9781337702621
Author: Kevin E. Murphy, Mark Higgins
Publisher: Cengage Learning
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Chapter 6, Problem 40P
To determine
Determine the amount to be deducting as salary expense and explain whether the given answer will change M corporation and payments are usual of other companies of same size in the industry.
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Lynette is the CEO of a publicly traded company TT company and earns a salary of $380,000 in the current year.
What is TTT Corporation's after-tax cost of paying Lynette's salary excluding FICA taxes?
Robert is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business. During the current year, ABC has net income of $325,000 after deducting Robert's $100,000 salary. In addition to his compensation, ABC pays Robert dividends of $250,000.
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Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax
bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $49,200
bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying
Aleshia a $49,200 dividend because the tax rate on dividends is lower than the tax rate on compensation.
Answer the following questions to determine whether Rover is correct in believing that a dividend is the better choice.
a. Regarding taxes, which would benefit Aleshia the most?
The $49,200 dividend
bonus.
because after taxes she would have:
b. Regarding taxes, which would benefit Rover Corporation the most?
The $25,000
because it would save Rover $
from the dividend and
in taxes.
c. Considering the two parties together, which alternative would provide the most overall tax…
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Concepts in Federal Taxation 2019 (with Intuit ProConnect Tax Online 2017 and RIA Checkpoint 1 term (6 months) Printed Access Card)
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